Capacity Collusion and Overcharge Estimation

Collusion may change price dynamics prior to and, especially, following a formal period of coordination. This paper presents a dynamic model of capacity choice under partial irreversibility to study the implications of a capacity cartel on price dynamics and damage estimates. We study both transitory pre- and post-cartel adjustment effects as well as a long-run effect and find that collusion damage continues after the cartel ends, and may persist indefinitely when demand remains constant. These effects imply biased estimates of cartel overcharge by both dummy-variable and forecasting methods, both of which rely on data during and after the collusion.